401k Division in Divorce

 Posted on October 21, 2015 in QDROs, Pensions and 401(k)s

It is no secret that the higher the account balance, and more diverse the assets inside a 401k, the harder the division is in a high-asset divorce. Recent changes to the law, as well as the interpretation of existing law, has fundamentally changed the way that these retirement accounts are valued and divided pursuant to a marriage dissolution action.

Valuation Methods

The traditional straightforward approach – account balance accumulated during the marriage divided by two – may be inappropriate for some complex property divisions in divorce actions, particularly if the account contains non-cash assets.

Assume that, at the time of marriage, Husband's 401k contains $10,000 in cash and 1,000 shares of stock valued at $30 per share ($40,000 total); at the time of divorce, there is $15,000 in cash and the shares are worth $50 each ($65,000 total). Under the normal subtraction method, there is $25,000 in community property. But the increase of separate property is separate property, so Husband is losing $20,000.

To account for anomalies like this, the Legislature added Section 3.007(c) to the Family Code, which states that the separate property in a defined contribution plan (which includes a 401k) may be traced, if necessary to divide the account in a just and right manner. The section is optional, meaning that the judge must only take it into consideration if an attorney or party points it out during a complex divorce.

Outstanding Loans

Once again, the traditional approach is to deduct the loan amount from the account balance and divide the funds that are actually in the account on the date of divorce. But the problem is that a 401k loan is both a loan and a receivable, because the loan is repaid via payroll deduction, at least in most cases. So, at the very least, simply subtracting the amount of the loan gives the judge an inaccurate picture of how much the 401k is worth.

Further complicating matters, some statements continue to add the outstanding loan balance to the account balance, so care must be taken to help ensure that the money inside the account is the only thing divided.

In a divorce action, every penny must be properly accounted for to avoid costly mistakes. For a consultation with an aggressive  Williamson County divorce attorney, contact our office.

Source:

http://www.statutes.legis.state.tx.us/Docs/FA/htm/FA.7.htm